Forex FOREX PRO WEEKLY, November 23 - 27, 2020

Sive Morten

Special Consultant to the FPA
Messages
14,021
Fundamentals

This week, guys markets mostly were quiet as major driving factors are extended in time and have no immediate impact on the prices. Besides the uncertainty with the US Presidency - this risk we've discussed in detailed last week, now markets concern with gap between worse CV19 situation and vaccine relief. Other words speaking - markets worry that it could be worse before it will become better. And we have to say that indeed, the reasonable background exists with this suggestion. This topic stands closely to the pandemic progress across the board with new restrictions and lockdowns as that make impact on economy. Finally, as we're coming to the end of the year, Brexit topic is becoming more popular again.

The headlines of this weeks talk the same - upward action in the beginning of the week because of vaccine news and downward action later because of grim perspectives.

Several market strategists have predicted significant gains in U.S. stocks in 2021, as long as Congress passes further fiscal stimulus and a vaccine becomes widely available in the first half. But the path for stocks could be bumpy while investors await those developments, they said.

Over the past few weeks, investors had largely looked past immediate risks from the pandemic. The benchmark S&P 500 index recently soared to record highs on evidence of high efficacy rates in two experimental vaccines - from Moderna Inc and jointly from Pfizer Inc and BioNTech SE. Both vaccines could be ready for U.S. authorization and distribution within weeks, Health and Human Services Secretary Alex Azar has said.

Economic indicators including a rise in jobless claims last week signaled that the recovery may have stalled, reflecting the need for further fiscal stimulus, some investors said. Data from IHS Markit’s flash purchasing managers’ index and the Conference Board’s consumer confidence survey are scheduled for release next week.

“We anticipate a vaccine becoming partially available this year, but that still leaves a gap,” said Colin Moore, global chief investment officer at Columbia Threadneedle Investments.

Questions about more stimulus have fed volatility expectations, investors said. Two U.S. Senate runoff elections in Georgia scheduled for January could decide which political party controls that chamber and hence the scope of further pandemic relief.

“The big event risk in 2021 might be that’s just completely off the table,” said Derek Devens, senior portfolio manager of Neuberger Berman’s options group, referring to further stimulus. “That would be a pretty negative event for the market.”

But overall, investors largely expect any further slide in U.S. stocks to be fleeting. Restrictions on mobility and economic activity in response to rising COVID-19 cases are likely to be more limited than in the spring, they said. New York City, for instance, has kept stores and restaurants open even as schools close.

Simply seeing a light at the end of the tunnel has helped limit investor anxiety, said David Lefkowitz, head of Americas equities at UBS Global Wealth Management. Even if a stimulus package does not materialize as expected, optimism about a vaccine could blunt any hit to U.S. stocks, in his view. “There’s a pretty clear line of sight to an improvement beginning after the first quarter,” he said. “I don’t think we’re going to see a huge pullback because the market knows that this is a very temporary situation.”

"We're still seeing a follow-through from that vaccine optimism with yesterday's news on Moderna," said Edward Moya, senior market analyst at OANDA in New York.
"But the key story is still about COVID-19 and the short-term pressures it's going to put not just on the U.S, but abroad and it's going to force Congress or the Federal Reserve to do more. Whether we get a stimulus after (President-elect) Joe Biden takes office or whether the Fed does more, the trajectory for the dollar is pretty clear: it's going to be much lower."

"Euro/dollar remains well-supported, buoyed by global optimism," said Chris Turner, global head of markets at ING in a note to clients. "Given the challenges Europe faces – in the middle of a second lockdown – the euro certainly won't lead the rally against the dollar, but we think the dollar decline is broad enough to drag euro/dollar back to $1.1920."


U.S. Treasury Secretary Steven Mnuchin called an end to some of the Federal Reserve’s pandemic lending. Mnuchin’s move re-appropriated some $455 billion allocated to the Treasury for other spending, but some investors were concerned about ending programmes that they think have played a vital role in reassuring markets.

The Fed also said it “would prefer that the full suite of emergency facilities established during the pandemic continue to serve their important role as a backstop,” a rare open confrontation with the government. The announcement curtailed optimism created by reports that Republican and Democratic Senators had agreed to resume talks on another coronavirus stimulus package.

“We do not see this dispute that has broken out between the US Treasury and the Federal Reserve as having much implication for the financial markets. For sure something like this is generally not good news at all but at the tail-end of an administration should mean the risk of actual harm to the real economy is limited,” wrote MUFG head of research Derek Halpenny. Halpenny also said that a possible lack of smooth transition between governments in Washington “creates additional uncertainty that only further reinforces the need for the Fed to fill the policy vacuum when it meets on 16th December”, which will keep the U.S. dollar weaker.

CV19 relapse and lockdowns situation


Fathom consulting reports that more countries across Europe have imposed restrictions on movement as identified cases of COVID-19 continue to rise. This week, Austria took the unpopular step of closing schools and non-essential shops, while Scotland announced that eleven local authority areas will be subject to level four restrictions from Friday, and non-essential travel into or out of these areas will soon be made illegal. Those moves follow the reimposition of restrictions in the Netherlands, Belgium, France and Germany, where COVID-19 cases have now started to come back down, as illustrated in the right-hand pane of the chart below. But elsewhere in Europe cases continue to rise, as shown on the left-hand side.

1605948291058.png

With many countries struggling to contain the virus, and lockdowns reimposed across much of Europe, it is likely that European output will shrink in the final quarter of 2020. The extent to which it shrinks will depend on the length and severity of the lockdowns in place, as well as adherence to them. So far, with lockdown conditions less severe than those imposed in March and with adherence seemingly slipping in most European countries, the negative impact on the economy is likely to be much weaker than during the first wave.

Even so, INSEE — the French national bureau of statistics — estimated earlier this week that France’s economic output will contract by anywhere between 2.5% and 6.0% in the final quarter. At the extreme, that will leave output around 10% below its pre-Covid level, shifting France from what has been a ‘V-shaped’ recovery onto a ‘W-shaped’ trajectory.

Fathom's Economic Sentiment Indicator, which distils information from numerous consumer and business surveys in order to provide a gauge of underlying economic activity in France, suggests that the downturn might not be quite as extreme, having softened a little in October but remaining above zero — the threshold which signals potential economic expansion or contraction.

1605948471860.png


Arguably, November’s data will be key, with the new restrictions on movement having come into force at the very end of October. For now, our Economic Sentiment Indicators for both France and elsewhere remain above the levels seen during the first outbreak. The impact of the English lockdown on UK GDP is expected to be lighter than the first because schools and many non-essential retail remain open, and most businesses are better adapted now to trading during economic restrictions.

Situation in the US also stands difficult in many parts of economy - employment, sentiment consumption etc., which makes investors to expect grim perspectives, at least in a short-term - U.S. economy faces looming test as coronavirus wildfire rages


BREXIT endgame

Britain and the European Union are said to be on the verge of clinching a post-Brexit trade deal that would regulate their relationship after the transition period ends on Jan. 1, 2021 -- six weeks away.

Diplomats say three sticking points remain and EU leaders are stressing the need to prepare for a no-deal. Brexit deadlines have come and gone several times in the past, but negotiators are making a final push and the consensus is London and Brussels will come to some sort of agreement - possibly a bare-bones deal with details to be decided down the line. Recent gains in sterling and UK stocks imply assets are pumped up by hopes of a COVID-19 vaccine and a Brexit deal. They could be in for a rocky ride.

An unexpected failure to agree could end the rally in UK stocks and sterling that has followed recent positive COVID-19 vaccine updates. Markets do not appear to be heavily positioned on sterling, government bonds or stocks, meaning either outcome could have a strong short-term impact on trading. Analysts say the key issue for markets is the future state of relations between London and Brussels.

The best-case scenario for both parties, a comprehensive post-Brexit trade deal is still possible and remained the expectation of economists in a Reuters poll published on Friday although they saw a 40% chance of no deal. Financial markets are not expecting this outcome, however, and five banks Reuters spoke to on Friday said a surprise agreement would trigger a 5% jump in the value of the British pound to 85 cents against the euro.

A last-minute “skinny deal” with an extension of the transition period would help support the pound at around current levels. But relief would be tempered by the economic realities, with the additional headwind of COVID-19 making any economic recovery a challenge. Morgan Stanley’s currency position tracker shows investors have shifted to a neutral gear on the pound, while hedge funds remain broadly underweight according to weekly positioning data. “Neither no-deal not ‘skinny’ deal is not going to reverse this trend and we maintain our underweight stance in UK stocks,” said Marija Veitmane, senior multi-asset strategist at State Street Global Markets.

A shock no-deal outcome would be blow to investors, who have been betting on some form of agreement for months now. That could see the pound fall as much as 7% from current levels to September lows of $1.2676, the banks said. Bank of England Deputy Governor Dave Ramsden said this week that financial markets are pricing in a roughly one-in-five chance (20%) of a no-deal outcome.

This week, sterling risk-reversals, which measure the ratio of put options -- giving the right to sell the currency -- to call options -- giving the right to buy -- fell below zero. Some large options, amounting to $1.5 billion, were meanwhile struck at levels around $1.25, indicating some investors were becoming cautious.

COT Report

This week CFTC reflects the overall sentiment on the market - minimal changes as the storm seems stands ahead. Net speculative positions barely have increased with minor positive change in Open Interest as well:
1605950193927.png

Source: cftc.gov
Charting by Investing.com


So the basic case scenarios either on Presidency or Brexit or CV19 vs vaccine gap promises no big trends on EUR currency as basic scenario in general holds the same balance as exists right now. In general it suggests moderately bullish performance on EUR as EU has imposed restrictions first, it prints less money and controls stimulus wisely. It means that EU should out from pandemic also earlier and EUR should keep the value vs. USD because of less liquidity measures. From that standpoint, we keep valid our plan with 1.25-1.29 EUR target.

Conversely, strong unexpected trends could be triggered only by some outstanding events, such as D. Trump 2nd term, or, say, no deal Brexit etc. But even such events mostly will have short-term emotional impact on the markets as longer-term balance is based on fundamental factors. This lets us to make couple conclusions. First is, EUR bullish view in long-term is still valid, second - if you want to make money on Brexit think about Stop entry orders on breakout of consolidation as potential of extreme scenarios stands around 10 points (1000 pips) in both sides. So, you could use even OCO type of orders.

At the same time, it is almost impossible to consider economical fundamental model right now with some view on inflation, interest rates and economical conditions because of uncertainty around pandemic final harm, vaccine timing and stimulus level. Still we intend keep trying to do it once more and more data becomes available.

Technicals

Monthly

Monthly chart better shows different scenarios as it has tighter relation to fundamentals. Our "basic view" suggests gradual action up from here, while "surprising scenario" is shown as butterfly. So we have interesting situation when longer-term perspective of two scenarios mostly stands the same while nearest future could be different. In a longer-term perspective, as we've said EUR supposedly should get an advantage on a background of new US stimulus, low interest rates held by the Fed, wider US budget deficit, better EU CV 19 situation. It should let EUR to reach 1.28-1.30 level. And technical picture supports this scenario. "CD" leg action looks strong while retracement after COP is tight and small. Market is not at overbought and major resistance stands around 1.25 area that already has been tested once in 2017. OP target stands relatively close around 1.28.

Thus, if our central scenario starts to realize, especially in a case of "Blue wave" (Although it doesn't look probable now), EUR could continue upward action immediately, forming reversal November month with nearest 1.25 target and completion of AB=CD pattern target.

Conversely, if "stormy scenario" with D. Trump successful effort to contest results will become a reality, "no deal" Brexit and worse out of lockdown - more probable US dollar appreciation in short-term. Technically, it could take a shape of gradual downside drift. Once D. Trump political resurrection becomes obvious - different pattern here could be formed that suggests deeper retracement initially. For instance, it could be butterfly "Sell". But longer-term consequences and final target stands intact, as major fundamentals remain the same.
eur_m_23_11_20.png


Weekly

Weekly time frame is good presentation of current sentiment on the market that we could call as "positive indecision". While market wants to move higher, it doesn't have necessary drivers for that. As market stands in consolidation - its borders clearly indicates the vital levels. Drop below 1.1630, or, I would better say below K-area turns short-term context bearish, while upside breakout should put the foundation for higher targets.

The reason why we treat weekly context bullish is twofold. First is, engulfing pattern, that is not triggered yet and not started extension swing. Second - signs of bullish dynamic pressure. Take a look while MACD trend stands bearish price action shows flat action, that potentially point on upside breakout.
eur_w_23_11_20.png


Daily

Daily chart looks a bit tricky right now. At first glance everything is good, market shows interesting symmetry and our entry last week around "B" point and K-support area was nice. And maybe some of you still keep this position. Still as we've discussed long entry on EUR this week few times, I still do not like the moment that price is too slow. Upward extension mode suggests stronger, impulse style action, while here we do not have it. This situation makes me think that maybe real upward continuation is not started yet. Who knows maybe acceleration will happen right on breakout of 1.19 area but here I show what I would like to get. Another leg down could provide everything that we need - clear "222" Buy pattern, Agreement support area right around daily oversold. Good combination for long entry.

But at current levels long entry suggests either far standing stops (depending on the pattern that you intend to use) or entry at breakout, that also might be tricky. As a result the best decision by our view is to hold longs if you have them since last week, but new longs it would be better to wait better context.

Intraday

Still, my desirable scenario looks too perfect. In reality the major question stands where we could go long and whether we would like to do it or not. On 4H chart it might be triangle, and from this point of view, my supposed downside AB-CD has low chances to happen:
eur_4h_23_11_20.png


So, it means that it should hold to keep bullish context. This, in turn, provides few options on 1H chart. Here we have rectangle consolidation. For instance, you could try to buy as close to the bottom as possible with stops below 1.18 K-area, our entry point two weeks ago. Alternatively, we could consider reverse H&S pattern inside the rectangle. Recently EUR very often forms this pattern. It suggests entry right at current price. Both of these scenarios show the possible way how to not wait "perfect scenario" and try to use what market is showing right now.
eur_1h_23_11_20.png

So, depending on your trading style, mentality you could choose what you like more - either wait for "perfection" if you're conservative, or try to use not as perfect but real setups that already on the market.
 

Sive Morten

Special Consultant to the FPA
Messages
14,021
Morning folks,

Today we mostly consider GBP as there we also have 2nd part of setup. Speaking on EUR - upward action that we've discussed in weekend has happened, but at the same time, we've got sharp reversal right after it. So, the daily chart gives another reason to wait a bit and see what will happen.

On GBP market has hit our AB-CD 1.3360 target, forming on daily chart "222" Sell pattern as well. The only flaw of this setup is lack of strong resistance. Actually, we do not have either Fib levels, or overbought - only "222" pattern, actually:
gbp_d_24_11_20.png


Our 2nd scenario, as we've said last week is 3-Drive Sell. It suggests drop somewhere to 1.31 area that actually corresponds to "222" minimal target as well. Here you could see that first reaction already has happened:
gbp_4h_24_11_20.png


On 1 H chat we could consider downside AB-CD pattern. As all major targets are hit there is not reasons for W&R and spikes, except direct upside continuation. Downside targets agrees with 1.31 strong K-area and next, extended target is around 1.30 which is XOP.

It is everything clear with this pattern. Invalidation point is "A", currently is comfortable moment to consider short entry as market stands in retracement and forming "BC" leg. If you think about selling GBP, you could consider this setup. To buy the cable, it would be better to wait either "A" upside breakout or completion of downside action. Here is I also put harmonic swings, that GBP holds pretty nice now.
gbp_1h_24_11_20.png
 
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